California Earthquake Authority Supports Federal Catastrophe Insurance Bill

The Homeowners Defense Act (H.R. 2555), a bill that would provide a federal backup for states with catastrophe insurance funds, would reduce California earthquake insurance premiums by about 35 percent, according to California Earthquake Authority CEO Glenn Pomeroy.

Pomeroy, who testified before the U.S. House of Representatives Subcommittee on Housing and Community Opportunity and Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, in support of H.R. 2555, said the bill would allow the CEA to lower its earthquake insurance rates and policy deductibles. “We believe that offering a more affordable earthquake insurance policy would help more Californians to insure their homes for potential earthquake damage,” he said. “By reducing costs, and as a result insuring more California homeowners, financial pressures also could be reduced for the federal government after the next big earthquake strikes.”

California is home to about two-thirds of the nation’s earthquake risk, with about 2,000 known faults, yet only 12 percent of its homeowners with a fire policy also are covered for earthquake shake damage.

“With so much earthquake risk throughout the state, and with a majority of California’s large population areas near faults, any opportunity to insure more of its homeowners before the next big earthquake strikes requires urgent Congressional consideration,” Pomeroy said.

A study by the U.S. Geological Survey and other scientists reported more than a 99 percent probability that a 6.7 magnitude or greater earthquake, capable of causing extensive damage and loss-of-life, could strike California any time within the next 30 years.

If a 7.2 magnitude earthquake occurred on the Peninsula segment of the San Andreas fault (on the San Francisco Peninsula, running up through San Francisco), it’s estimated that residential losses could be approximately $55.1 billion. At current estimated take-up rates, however, only $4.1 billion of these losses would be covered by insurance, while $51 billion would be uninsured.

Title II of H.R. 2555 would allow the CEA to replace much of its current reliance on expensive reinsurance, with the certainty to access the private debt (bond) market, to the extent needed, Pomeroy said. All funds borrowed under a federal guarantee would be repaid over time by the CEA after a major event. Savings from reducing the CEA’s reinsurance expenses would be passed through to consumers — reducing current CEA rates by about 35 percent, he added.

If H.R.2555 becomes law, CEA modeling indicates that the probability of borrowing funds would be between 0.5 and 1 percent, minimizing the need for a temporary premium increase necessary to repay any federally guaranteed debt, Pomeroy said.